What should I do with $100,000 in tax-free cash?
My wife and I make about $120,000 combined. We are both in our early 40s. No children. We have no debt other than our home. We owe $114,000 on a 15 year fixed. We have about $200,000 in investments (IRAs, Taxable accounts) and about $50,000 cash ($10,000 in a normal checking account. $35,000 emergency fund in a higher interest rate savings account). We both contribute the maximum per year to our IRAs. My wife will have a pension of about $2400 per month in retirement.
My thought is to put the whole amount of $100,000 into our taxable investment account. All of our accounts have a good mix of stocks and bonds. Currently, all investment accounts are at 90% stocks and 10% bonds. Additionally, I thought I would reduce our cash holdings to a more realistic $15,000 emergency fund, and invest the remaining $35,000 into our taxable investment account.
The short answer to your question is that I do not see anything wrong with your plan.
More detailed insights and suggestions are as follows:
Consider Paying Off Your Mortgage - My guess is that the rate on your 15-year fixed mortgage is really low (2-3%?). However, since we are in an environment where yields on fixed income investments (e.g., CDs, bonds, etc.) are also near historic lows, and since 90% of your retirement portfolio is in stocks, using your cash to pay off some or all of your mortgage is not necessarily an outlandish recommendation. There merits of this concept increase if you and/or your wife’s jobs are potentially vulnerable to economic downturns.
Emergency Reserves are Overrated - I tend to agree with your proposal to reduce the size of your emergency reserves. Given that even “high interest” cash earns next to nothing, it seems ill-advised to keep large sums of dead money in reserve, especially when other sources of inexpensive capital (e.g., home equity, portfolio liquidation, 0% interest 12-24 month credit card deals, etc.) may be tapped in a pinch. For more on this concept, see the following article links –
Emergency Funds are Overrated (DQYDJ.net)
Is an All Cash Emergency Fund Strategy Appropriate for All Investors? (Journal of Financial Planning)
Should You Keep Your Emergency Fund In Your 401k? (My MoneyBlog)
Can Your 401(k) Be Part of Your Emergency Fund? (Financial Finesse)
How To Use Your Roth IRA As An Emergency Fund (Investopedia)
Consider Taking Advantage of Employer Retirement Plans for Greater Tax Savings - Your IRAs permit you to sock away $11,000 (combined) each year on a tax-deductible basis for retirement. If you and/or your wife are eligible to contribute to employer sponsored retirement plans, you may be able to significantly increase the amount of your pre-tax contributions. For example, if you and your wife each contributed to an employer sponsored 401(k) plan, you could each contribute up to $18,000 on a pre-tax basis ($36,000 total) in 2016.
Consider Rising Dividend Stocks for Your Taxable Investment Account – In a low interest rate world, investing in shares of U.S. companies that pay qualifying dividends can be a neat way to begin building a future retirement income stream. This approach may be particularly attractive today, since dividends and long term capital gains receive favorable tax treatment relative to earned income and ordinary interest income. See the following article links –
On the Hunt for Rising Dividends (Bloomberg)
Stocks That Pay Rising Dividends (Kiplinger’s)
Not enough income to retire? Dividends can help (USA Today)
If you would like to assess whether you are on track for a secure retirement, Nest Egg Guru’s Retirement Savings Calculator offers realistic stress testing and enables users to easily see how changing variables that are within their control may impact their results.
The plan of putting it into taxable investments is a solid one - here's why...when you retire, most tax sheltered plans will taxable when you withdraw the money. They're tax deferred, not tax free. When you withdraw from a taxable account, the withdrawals are tax free, since the tax has already been paid on them. Roth IRAs are the exception - they're tax deferred during accumulation, then tax free at withdrawal, creating a best of all worlds investment vehicle (hint: start one if you can!).
We can think of this as a form of retirement tax diversification, in which you have a mix of both taxable and tax free retirement income sources. This is doubly important since Social Security benefits can become partially taxable if you pass certain income thresholds.